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August 15, 2013

Eye on Renewables: Hot Markets to Watch

The first in a two-part series on renewable energy sources.

Changes are afoot in the energy sector, with increasing emphasis on renewables and rising opposition to fossil fuels. With everyone from investors to corporations to governments and world financial institutions taking action to drive a switchover, investors should be aware of some of the latest trends.

Opportunities appear abundant in renewables. In Australia, for instance, new research finds that by 2040 Australia’s energy grid could be 100% renewable if it continues deploying renewable technology just a little faster than its current pace. Currently the Australian government’s target is 20% renewable energy by the end of the decade.

The research, from Andrew Blakers, director of the Center for Sustainable Energy Systems at Australian National University, indicates that the move will come without a specific mandate to convert to renewables, since existing power stations that are dependent on fossil fuels will be replaced at the end of their service lives by plants using alternative sources.

Bloomberg New Energy Finance has also indicated that the cost for alternative energy will not be greater than that for fossil fuels, either, because wind power is already cheaper than the cost for new coal- or gas-powered production, and solar is coming down in price. The perception of alternative energy plants as high-priced, said BNEF, stems from the fact that alternatives are frequently compared to 40-year-old fossil fuel plants that are fully depreciated. When set up against the cost of new-construction plants to replace old ones that are shutting down, that is not the case.

Blakers’ research used even more conservative technology cost forecasts to arrive at its conclusions than BNEF; it drew instead upon the forecasts from the Bureau of Resource and Energy Economics. The result was similar, but with a slightly longer timeline.

Still, the speed with which Australia is approaching 100% renewables is likely to continue, since it was already at 10% in 2010. Rooftop solar energy production is popular there, and that, coupled with plans for a fixed 41,000GWh target for large-scale renewables, could help the country blow past its milestone of 20% by 2020.

AGL Energy Ltd., Australia’s largest developer of renewable energy projects, said at the end of July that it was proceeding with the country’s largest solar power development. The 155-megawatt project will take shape at two sites in Broken Hill and Nyngan in New South Wales. It will cover a combined area four times the size of downtown Sydney, and will be built in collaboration with U.S. company First Solar Inc. The project is estimated at A$450 million ($408 million), with A$166.7 million coming from federal and A$64.9 million from state funds. The Nyngan plant alone is expected to be the largest in the southern hemisphere.

BNEF said that as wind and solar proliferate in replacement of fossil fuel power, Australia could hit 46% by 2030, and the rate of replacement could accelerate in the ten years following, as old plants are replaced with new. BNEF also said that fossil fuel could end up being pushed out of the market as alternatives and new power storage options emerge. In a report issued at the end of June, BNEF said the country is expected to install about 5,000 megawatts of large solar photovoltaic plants through 2020; at present the total in the country is 17 megawatts in large-scale capacity.

Australia is not the only country pressing forward on renewables. On the other side of the world, Peru has launched a program to bring electricity to 2 million of its poorest citizens via solar power. In the first wave of installations in early July, the National Photovoltaic Household Electrification Program installed 1,601 solar panels in the Contumaza province in the districts of Cupisnique, San Benito, Tantarica, Chilete, Yonan, San Luis, and Contai. They are expected to provide power to 126 poverty-stricken communities.

Plans for installation of another 12,500 solar systems will reach 500,000 households, and those installations are to be put out for contractor bids. According to Jorge Merino, energy and mining minister, the entire program is expected to cost about $200 million and provide access to electricity to 95% of the country by the end of 2016. Currently only about 66% of Peru’s population of over 24 million has access to electricity.

The country, which was the site of the first major photovoltaic installation in Latin America, has committed to accelerate the development of renewable energy. It’s in a good position to do so, with average daily solar radiation levels that can reach 5 kWh per square meter a day in the Andes foothills, known as the Sierra.

In Latin America in general, the outlook is promising. Analyst Stephen Simko at Morningstar, speaking specifically about solar, said in an e-mail interview that “[t]here’s plenty of solar potential in Latin America; Chile is a market that gets talked about a lot, and First Solar just made an acquisition that included some Mexican projects.” But regarding scale, he said, “It will be many years before solar reaches a point there where it is the same size as China/Japan/U.S./EU ...” With so much room to grow, opportunities abound.

Fitch Ratings also viewed the region positively, saying in its midyear outlook on infrastructure that “Construction schedules of new onshore wind farms are proceeding as expected in Argentina, supported by experienced sponsors in the development of similar projects. Concurrently, the performance of existing wind farms in Mexico is exceeding projections, sustained by historical wind resources. Ample wind data is typically used to project future wind resources with greater level of confidence.”

With First Solar partnering with Australia on such a massive project, and having made an acquisition that gains access to Mexico, one might think that the U.S. is where it’s at for investment in alternatives. Not necessarily so, said Simko, particularly regarding the Australian project: “China companies and First Solar will surely dominate Australia—the country has next to no solar manufacturing of its own, so essentially all panels will be imported … the one major module factory was BP’s, and they shut that down a while back. It’s hard to compete with China on a commodity-based manufacturing product like solar panels… I’d say the biggest renewables investment opportunity by far is China.”

That appears to be borne out by China’s current drive to clean up its own act, spurred on by an incident beginning in January in which Beijing was cloaked in smog for several weeks. The smog was so dense that particles 2.5 microns or less in diameter were present in a concentration of 900 parts per million. The World Health Organization puts a safe level of such particles at 40 times less than that.

The Chinese government, fast on its feet when it chooses to be, began only a few months later to implement green policies. Beginning in mid-June, the government began implementing policies that many other countries are still just talking about: it launched China’s first carbon market, made it easier to prosecute those who commit environmental crimes, and tied responsibility for local pollution problems to local officials. It also threw money at the problem, committing to spend $275 billion over the next five years for atmospheric cleanup.

China is the largest investor in the world in green energy. According to REN21, a network of policymakers, the Chinese government intends to roughly double its investment in solar and wind power in 2011–16, compared with 2006–2010. Last year alone the total reached $67 billion, and its energy targets are no less impressive: 100 gigawatts of wind capacity and 35 gigawatts of solar capacity by 2015. All that hard-won advancement will eventually be exported, given China’s position in world trade, and the rest of the world may end up benefiting from China’s drive to greener pastures.